Guide to Using International Standards on Auditing in - IFAC

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<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
Address
Possible
Management Bias
Description
• Identify whether there are indica<strong>to</strong>rs of possible management bias. This could
include changes in the way estimates are calculated, or the selection of a
point estimate that indicates a pattern of optimism or pessimism. This could
occur where estimates consistently lie at one boundary of the audi<strong>to</strong>r’s range
of reasonableness, or where the bias moves from one boundary of the range
<strong>to</strong> the other in successive periods. For example, where management puts the
business up for sale and the earnings goal changes from tax minimization <strong>to</strong>
maximization of earnings.
• Consider the cumulative effect of bias in the preparation of management’s
accounting estimates.
Where the estimate is complex or involves specialized techniques, the audi<strong>to</strong>r may determine it is necessary
<strong>to</strong> use the work of an audi<strong>to</strong>r’s expert (see Volume 1, Chapter 15.7 (ISA 620) for guidance on using the work of
an audi<strong>to</strong>r’s expert).
11.4 Reporting
Paragraph #
Relevant Extracts from ISAs
540.19 The audi<strong>to</strong>r shall obtain sufficient appropriate audit evidence about whether the disclosures
in the financial statements related <strong>to</strong> accounting estimates are in accordance with the
requirements of the applicable financial reporting framework. (Ref: Para. A120-A121)
540.20 For accounting estimates that give rise <strong>to</strong> significant risks, the audi<strong>to</strong>r shall also evaluate the
adequacy of the disclosure of their estimation uncertainty in the financial statements in the
context of the applicable financial reporting framework. (Ref: Para. A122-A123)
The final step is <strong>to</strong> determine whether:
• Sufficient appropriate evidence has been obtained. Where sufficient appropriate evidence is not available
or the evidence refutes management’s estimates, the audi<strong>to</strong>r would discuss the findings with management
and consider the need <strong>to</strong> change the risk assessment and perform further audit procedures;
• The accounting estimates are either reasonable in the context of the applicable financial reporting
framework, or are misstated; and
• Disclosures in the financial statements about the estimates:
– Are in accordance with the requirements of the applicable financial reporting framework, and
– Adequately disclose their estimation uncertainty, if they give rise <strong>to</strong> significant risks.
Written Representations
The audi<strong>to</strong>r would obtain written representations from management regarding the reasonableness of
significant assumptions.
Also consider obtaining a written representation as <strong>to</strong> whether the assumptions appropriately reflect
management’s intent and ability <strong>to</strong> carry out specific courses of action relevant <strong>to</strong> any fair value
measurements or disclosures.